Copycats in China: The canary in the coalmine for foreign companies?

In Insights, Uncategorized

16 November, 2015

The recent media report concerning the “fake” Goldman Sachs in China has sparked another series of stories about counterfeits in China… but has it sparked a call to action yet? Throwbacks to the bogus Apple stores and the concocted IKEA shops both found in Kunming in 2011 come to mind. Whilst foreign companies are amazed or even amused by such stories, the question is whether or not they have really deliberated upon the issue of how they can best protect themselves from this happening in the future, and whether or not they have considered necessary next steps as the canary emerges from the coalmine?

The expose of the fake Goldman Sachs was first covered by Bloomberg in late August 2015. A company called Goldman Sachs (Shenzhen) Financial Leasing Co. was said to be operating in Shenzhen, a city in the south of China. This company also used the Chinese trade name of the real Goldman Sachs, and it claimed to provide financial leasing services. It had a website; however this was allegedly no longer available when the reporters tried to access it. The financial leasing company did not claim to be related to the real Goldman Sachs based in the US, but it did not explain how its name came about. This bogus Goldman Sachs was alleged to be related to triads and gambling activities in Macau, and it came to light after a US based casino workers’ union – which monitors the gambling industry in Macau -requested that China investigate the company.

The foreign media has described the spurious Goldman Sachs as another “pinnacle of fakes” in China. But, the incident of the fictitious Apple stores in China has already demonstrated that this is not a new phenomenon. In fact, shortly before the counterfeit Goldman Sachs was revealed by the media, a fake branch of the China Construction Bank, which is said to be the second largest bank in the world by assets, was established by a man in Shandong province in July this year. And he only spent RMB 4,000 to set it up. The bogus branch supposedly looked like the Real McCoy – that is, a genuine bank with counters, computers and all the trimmings. In addition to replicating the name, it also adopted the logo of the bank. The scam was discovered when a person who deposited RMB 40,000 and was given a passbook, could not withdraw the money from a real branch. Curiously, the culprit thought this a quick way to make money. He was arrested by the police in August.

Another more recent case involves dm-drogerie markt, which is a chain of retail stores that sells cosmetics, healthcare and household products, and health food, and it is one of Germany’s major retailers by revenue. In September 2015, it was reported that the dm drugstore was replicated in Shenyang city, in Liaoning province. The sham drugstore copied the decor, used the trademark and also dm’s advertisement in German. The drugstore had not opened for business, that is, it was not yet operational, when the report came out. According to the CEO of the company, Erich Harsch, the real dm does not have any drugstores in China, and the company has not authorized anyone in China to use its brands- including its trademark or slogan. The company has not yet decided what action will be taken, if any. According to media content analysis, the baby food scare in China led to a lot of Chinese tourists purchasing milk powder from the original dm-drogerie markt in Germany, so the name is arguably synonymous with premium milk powder and other domestic goods. The dm drugstore name was accordingly assumed by the counterfeiter to lend credibility to its product in a bid to make more money.

The underlying commentary that one can take away from these incidents is that respect for IP rights is still lacking and enforcement of IP rights is still fundamentally weak in China. While this may to some extent be true, foreign companies must do what they can, within the Chinese framework, to minimize the damage.

It appears from media reports that a significant majority are taking a rather pessimistic view of Goldman Sachs’ prospects of succeeding against the counterfeiter in court given that it is difficult for a foreign plaintiff to overcome the necessary hurdles to convince the court that there has been trademark infringement, and that it is still customary that the first who has registered the name will win. However, the position for Goldman Sachs is not as bleak as portrayed. According to the Chinese Trademark Office’s online database, Goldman Sachs registered its name “Goldman Sachs” and its Chinese name, as trademarks in China in respect of financial services within Class 36 many years ago. The counterfeit leasing office by contrast, does not have any registered trademarks in China. Given that the marks and the services in question are directly in conflict, it should not be too difficult to convince the Chinese courts that there has been trademark infringement.

In the event that Goldman Sachs had not registered its trademark, and the charlatan leasing company had, the real Goldman Sachs could have been sued for trademark infringement and may have been precluded from operating in China under its name.

This brings us back to the New Balance case in April 2015. The US New Balance had not registered its trademark for the Chinese name it had been using in China while a Chinese company had, all the while allegedly using the same Chinese name on its shoes. The Chinese company sued. The original New Balance was ordered by the Guangzhou Intermediate People’s Court to pay a record high of RMB 98 million as damages for trademark infringement. It is reported that the US New Balance has filed an appeal.

Unlike the fake Goldman Sachs, the bogus dm drugstore did not seem to attract the same attention from the English media. But, the fake dm drugstore case illustrates the types of difficulties and obstacles lesser known MNCs – but nevertheless very well established foreign companies – can face in China. These companies have never entered the Chinese market and they have not registered their trademark in China. They are walking a slippery slope and face the thin end of the wedge in the event they have not registered their trademarks in China – and are pipped at the post by counterfeit establishments who adopt their name, logo and brand for monetary gain.

The most crucial lesson here is to register your trademark in China before somebody else does. China is a first to file jurisdiction. In other words, beat them to the punch-line or you may very well face massive financial headaches and challenges put up by opportunistic pirates, not to mention legal ones in the case of preemptive bad faith registrations by trademark squatters. Even if you have not taken the necessary steps to enforce your rights against others in China, the fact that you have registered your trademark will be sufficient to protect you from infringement claims and you can still carry on with your activities in China without staring down the barrel of a lawsuit and/or any attached penalties.

Ai-Leen Lim, CEO and Principal Counsel, AWA Asia

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